TMI Blog1998 (3) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... "3. Whether, on the facts and in the circumstances of the case and in law the Tribunal was right in holding that the additional liability on account of exchange fluctuations in repayment of foreign exchange loans from financial institutions for purchase of machinery was not revenue expenditure ?" The assessee-company filed a return of income on August 30, 1980, in respect of the assessment year 1980-81, in response to the notice under section 143(2) of the said Act. The company had claimed a loss of Rs. 80,414 on account of exchange fluctuation of repayment of foreign exchange loans obtained from the financial institutions for the purchase of machinery. According to the assessee, the said expenditure was incurred not on acquisition of the asset, but on repayment of loan and was therefore allowable as a revenue expenditure. According to the assessee, the provisions of section 43A were therefore not applicable, The Assessing Officer negatived this contention and relying upon the decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, held that the loss on account of exchange rate fluctuation in the instant case, was referable to capital asset and henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the last instalment of the repayment of loan was paid because only by that time the actual payment in Indian currency in respect of the cost of machinery purchased on the basis of foreign currency can be ascertained. It was held that the investment allowance if granted in the first year of use on the basis of the conversion of the foreign currency into Indian currency at the then prevailing exchange rate, would require modification on the basis of the correct cost determined finally and looking at the matter from this angle, the additional liability incurred by the assessee was nothing but a part of the cost of the plant and machinery, which was required to be varied because of the method of adopting cost of machinery arrived at on the basis of the then prevailing exchange rate. It was, therefore, held that the additional liability should be treated as a part of the cost of machinery entitled to investment allowance in the year in which the additional liability was incurred because of the fluctuation in the exchange rate, irrespective of the fact that the machineries were installed in the past previous year. The Income-tax Officer was therefore, directed to modify the assessment ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f payments of outstanding instalments of machinery, to be treated as revenue expenditure. In Sutlej Cotton Mills Ltd. [1979] 116 ITR 1, the Supreme Court held that where profit or loss arises to an assessee on account of appreciation or depreciation in the value. of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss, if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. It was held that what is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. The said decision was rendered in the context of the provisions of the Indian Income-tax Act, 1922, since the matter related to the assessment years 1957-58 and 1959-60. In our view if a taxpayer incurs obligations and before such obligations have been satisfied by payment there is a variation in the rate of exchange which involves him in a loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that previous year in which it is put to use. It was, therefore, argued that there was no scope for changing the quantum of the investment allowance once it is worked out in the relevant previous year. The provisions which allow the deduction, if not availed of due to insufficiency of total income, to be carried forward up to eight years, contained in sub-section (3) of section 32A, cannot be so construed as to entitle revision of investment allowance in such subsequent years. It was also contended that section 43A(1) did not warrant any such revision of investment allowance which was already quantified in the past relevant year. Learned counsel appearing for the assessee strongly contended that the investment allowance was to be worked out on the basis of the actual cost of the machinery or plant as provided under section 32A. In cases where there is additional liability due to fluctuation in the exchange rate, the actual cost is to be revised and if as a result of that revision the assessee becomes entitled to a higher investment allowance, there would be no justification for denying the same in the previous year in which the additional liability had arisen. It was contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of this court in CIT v. Motor Industries Co. Ltd. [1988] 173 ITR 374". That first question related to investment allowance and was not in respect of depreciation allowance. Section 32A(1) which falls for our consideration, to the extent it is relevant in the context of the contentions raised, reads as under : "32A. Investment allowance.-(1) In respect of a ship or an aircraft or machinery or plant specified in sub-section (2) which is owned by the assessee and is wholly used for the purposes of the business carried on by him there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent. of the actual cost of the ship, aircraft, machinery or plant to the assessee :..." If we analyse this provision, the following four separate aspects are reflected. Firstly, this provision identifies the ship, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year in which it is installed and first put to use, would be the basis of working out the investment allowance at an amount equal to 25 per cent. of that actual cost. The amount of investment allowance so worked out would get crystallised in that year and thereafter the only question that remains is whether the investment allowance which is so worked out and to which the assessee is entitled for claiming deduction, should be actually allowed by way of deduction. As noted above, section 32A(1) provides that the deduction should be allowed in accordance with and subject to the provisions of section 32A. That would happen only after the investment allowance admissible to the assessee is worked out on the basis of the actual cost at 25 per cent thereof. The conditions laid down in sub-section (4) have also to be satisfied before such deduction is allowed and one of the important conditions is that of creation of a reserve account by the assessee. The assessee who has sufficient total income, can be allowed deduction of the full amount of investment allowance in the very first year of his entitlement, namely, in the first previous year in which the machinery or plant was put to us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous year of the full amount of investment allowance. In the next succeeding year if there is a total income then, to the extent it can cover up the investment allowance out of the full amount of investment allowance or its remaining part, and a reserve can be created, the investment allowance would be actually allowed in that assessment year and the balance of the investment allowance if any still outstanding after that exercise, will be carried forward to the following assessment year and so on up to the maximum of eight assessment years immediately succeeding the assessment year relevant to the previous year in which machinery or plant was installed or first put to use. Therefore, the expression "to be actually allowed" in clause (ii) of section 32A(4) has reference to the full amount of the investment allowance or that portion of the full amount of the investment allowance which is to be actually allowed in the assessment year, which exercise is to be done in accordance with sub-sections (3) and (4) of section 32A only till the full amount of the investment allowance gets deducted or the said period of eight assessment years expires, whichever is earlier. The provisions of sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be, deducted from, the actual cost of the asset as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) of section 36 or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, -the cost of acquisition of the capital asset as aforesaid...... (2) The provisions of sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under section 33." It was contended on the basis of this provision that sub-section (1) of section 43A is expressly excluded in its application for the purpose of deduction on account of development rebate under section 33 and it must therefore follow that since no such provision is repeated for section 32A, the provisions of sub-section (1) of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deductions which may be allowable in respect of that previous year and cannot relate back to the earlier previous year so as to retrospectively change the actual cost that prevailed in that year and could not have been altered by foreseeing any change in the exchange rate. In other words, the change in exchange rate cannot project back to the period prior to the date on which such change took effect. The deduction of investment allowance can be allowed in respect of the previous year in which the machinery was installed or first put to use. If the deduction becomes allowable in that relevant previous year, the full investment allowance is to be worked out on the basis of the actual cost of the machinery or plant to the assessee at that relevant time. That quantification of the amount at 25 per cent of the actual cost to be allowed by way of deduction as investment allowance got crystallised on the basis of the actual cost and no change can be made therein for that previous year on the basis of any fluctuation that takes place in the exchange rate in the subsequent years which will have impact only on the liability to pay as it stands immediately prior to the date of fluctuation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase of machinery from abroad, and this was in the context of the proposal to withdraw the depreciation allowed by the Income-tax Officer on the extra liability incurred by the assessee as a result of periodical variation in the market rate of exchange. Therefore, these decisions do not help in construing the provisions of section. 32A in the context of the provisions of section 43A of the Act. Much reliance was placed on the decision of the 'Supreme Court in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255, by learned counsel for the assessee, in support of his contention that all allowances referred to in sub-section (1) of section 43A will have to be based on the adjusted actual cost and, therefore, the investment allowance should be recomputed on the basis of the adjusted actual cost. For the reasons which we have already given, no such result can be achieved of disturbing the quantification already made in the relevant previous year of the full amount of investment allowance on the basis of the actual cost in that previous year. When the Supreme Court holds that all allowances including development rebate or depreciation allowance or other types of deductions referred to in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 124 (Cal), is wholly misconceived because in that matter it was held that the machines which were lying idle and were kept for installation were installed only in the year under reference and, therefore, the Tribunal was right in concluding that the machinery so installed was new as the installation was completed during the accounting year relevant to the assessment year. Reliance was placed on the decision of the Supreme Court in CIT v. J.K. Hosiery Factory [1986] 159 ITR 85, in support of the proposition that in case of doubt the assessee is entitled to an interpretation which is favourable to him. There can be no dispute about this proposition. In the present case, there arises no doubt as regards the interpretation of the provisions of section 32A(1) and section 43A. The language of these provisions is clear enough to warrant the only conclusion at which we have arrived leaving no scope for any doubt as regards the interpretation of these provisions. In view of what we have said above, question No. I is answered in the negative, in favour of the Revenue and against the assessee. The reference stands disposed of accordingly with no order as to costs. - - TaxTMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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